When it comes to borrowing money, many people prefer taking personal loans as opposed to using their credit cards as they can get more from it, the process is easier, and the rates are better.
Once you do get approved for a personal loan, the money is sent directly to your bank account. However, you have to decide whether you want to get a fixed term loan or a fixed interest rate loan.
A fixed term loan is usually less than 5 years and you can pay off the debts quickly. With a fixed interest, your monthly payment and the interest rate stay the same, however, if you are over 60 days late the interest rate on your current balance can be increased.
However, when you are getting a personal loan, you should be very careful about what you’re getting into. A lot of contracts come with certain tricks and traps that don’t even have to be buried away because the lenders will convince you that it’s in your best interest.
If you are well versed in these common traps, you can avoid them.
Insurance
Getting a life insurance can be a great means of protecting your family in case any calamity should occur. When you are considering getting a life insurance, you should look through all your options in the market and come up with the best one.
However, a lot of loan lenders, while closing the loan, might ask you to also add an insurance cover to the loan. This increases the premium of the loan. Furthermore, these insurances usually charge a premium far higher than the ones available elsewhere in the market.
To avoid this trap, you need to ask pointed questions about how the claims will be made, what would be the premium on the load, and other such questions. Only if you are satisfied with the answers, and if you’ve surveyed the market, should you purchase the loan.
Pre-Compute Interest
While Pres-Compute Interest may be hard to explain, it’s the worst deal you can get stuck with. It calculates interests in a complex manner and you end up paying a far higher interest in the initial years of the loan than you would otherwise. As such, you might pay off your loans earlier than anticipated, but you’ll do so at a higher interest rate.
In the advertisements, they may mention ‘no prepayment penalty’, however the interest will be calculated based off the ‘precompute’ method and you will end up paying more.
Origination Fee
Most personal loans charge an origination fee, which is why most people get stuck with a bad deal. You should calculate the APR of a loan, not the interest rate. And in order to avoid getting stuck with the fee, you should realize that the fee is already deducted from the loan amount.
Penalties for Prepayment
Even if penalties aren’t charged directly for prepayment, they may be charged via pre-compute interest and the origination fees. Be sure to ask if there’s a prepayment penalty, and if so, then avoid it entirely.